Risky business

The world is a risky place, and never more so for the insurance industry.

The first panel session at the Risk and Insurance Management Society’s (RIMS) Australasia forum in Melbourne today made that crystal clear.

XL Catlin Country Head Australia Robin Johnson, JLT CEO Leo Demer and Chubb Country President Australia John French had plenty to say about the region’s top risks, and their impact on insurers and brokers.

RIMS says the top threats in Australia, as voted for by risk managers, are:

Increased competition

Economic conditions

Failure to innovate

Targeted cyber attack

Political risk

Reputational damage

Contractual risk

Attracting and retaining talent

Failure of critical IT systems

Tightening and changing regulation

Mr Johnson says if you look at the top four, “there’s a bit of a narrative”.

“It goes back to 2008 and the low interest environment that resulted from the financial crisis. It led to a massive build-up of capacity in almost every industry – oversupply and not enough demand.”

This, exacerbated by technological development, has led to heightened competition, he says. And insurance has been among the hardest-hit industries.

“It all has its roots in 2008. Low interest rates are terrible for insurers. Prior to 2008 it didn’t matter if we were making money from insurance – we made money from our investments.

“Added to this, tens of billions of dollars of alternative capital have poured in, driving down rates and increasing competition.

“These are tough times in our industry and mergers and acquisitions are the tune of the day.”

Mr Demer says the market is at “an interesting stage”.

For the first time in five years, insurers are walking away from risks, he says.

“If you look at the insurers’ results from the past couple of weeks, the numbers aren’t great,” he said. “There has been a bit of pushback. Some younger brokers can’t believe they have been told ‘no’.

“I believe we are going to see brokers having to broke again, rather than just getting quotes. The skill of brokers is finding an underwriter in the right place at the right time.”

The panel members say bespoke solutions for clients will still be sought, despite companies growing ever larger due to mergers and acquisitions.

They also agree the three-way relationship between client, broker and underwriter is crucial.

Mr French says the Ace-Chubb merger has brought many benefits, and bespoke solutions are “very much on our radar. The relationship is the absolute core.”

Mr Demer says bespoke solutions are the future and “one-size-fits-all programs for a lot of people are not going to cut it”.

Failure to innovate is undoubtedly a key risk for the industry – but there is much work to do.

“From a broking perspective there is not as much innovation as there should be,” Mr Demer said.

“When the market does turn, those that are not ready will be left behind. When it does move it is going to move very quickly.”

Mr Johnson says XL Catlin recognises the importance of innovation and has a number of initiatives to stay ahead of the curve.

These include working with Oxbotica – which spun out of Oxford University’s mobile robotics department – on autonomous vehicle technology.

“While we know this kind of thing is the future, we don’t know how to underwrite it because we have no data,” he said. “This kind of partnership gives us that data.”

Mr French says the innovation discussion is an industry issue, not just a company one.

“We need innovation in service as well as product,” he said.

The panel agrees cyber risk is a key concern, but Mr Johnson says cyber cover is relatively rarely purchased in Australia compared with the US.

“If you have a data breach here you don’t have to tell anyone and your customers may never know,” he said. “It is going on, but if you don’t have to notify anyone there aren’t those huge costs involved.

“Until those regulations come in, then there is not the immediate pressure to buy cyber cover like in the US.”

Mr French says it is hard to predict when regulations on data breach notification will change, but “we just have to be ready”.

Mr Demer believes the biggest obstacle to purchasing cyber cover is the cost of premiums.

“It is too expensive. It has all sorts of bells and whistles that may not be required. There is a need for just some basic cover.

“It’s a product most people should have, but at the moment the resistance is on price.”

Increasing demand for political risk cover was reported by the entire panel, with Mr French describing the current global environment as “the most volatile since World War II”.

“You think you know what is going to happen,” Mr Demer said. “But Brexit was never going to happen and look how that worked out.

“It is a volatile environment and there are big implications for clients that trade overseas.”

The world may be rammed with risks at present, but the Australian insurance industry is determined to navigate its way through them. Its survival – and that of its clients – may well depend on them succeeding.